Sunday, January 23, 2011

Silver Price Correction - Update on Potential Targets

I last spoke about some Silver correction targets shortly after the spike to $29.33 (November 9th), however Silver then proceeded to rally higher peaking at $31.24 around 7 weeks later (January 3rd). It appeared to have broken a resistance line that was 7 years in the making as discussed in this post, however has once again started to correct in price. Silver is certainly a volatile metal and the short term price movements are hard to predict.

After the parabolic spikes in 2004, 2006 and 2008 we saw sharp corrections following:

2004
$8.62 - April 2nd, 2004 (peak)
$5.43 - May 10th, 2004 (trough)
37% drop

2006
$16.68 - April 18th, 2006 (peak)
$9.40 - June 14th, 2006 (trough)
44% drop

2008
$21.35 - March 17th, 2008 (peak)
$15.96 - May 1st, 2008 (trough)
25% drop

It's interesting that each of the corrections were similar in size from a timing perspective (all corrections played out within 6-8 weeks and all around 2 years apart).

Given the new high of $31.24, here are some price correction targets based on the size of the earlier corrections:
25% drop - $23.43
37% drop - $19.68
44% drop - $17.49

That's not to say I think that's where the price is going, however we should keep in mind just how quickly Silver has risen in price the last few months.

I think a correction of 44% is extremely unlikely. $19.50 was very heavy resistance prior to Silver breaking through late in 2010 so IF Silver were to fall below $25 then I think between $19.50 and $21.50 (near 2008 peak) would provide a huge amount of support.

That said, my personal opinion as I've mentioned before is that Silver/Gold are heading into the third stage of their bull market, I think from here the corrections will generally be shallower than those we saw earlier in the bull market. We may have already seen the bottom on Friday...

The commercial traders have continued to reduce their short exposure to both Gold and Silver the last few weeks. Generally this points to a bullish outlook for the price (as commercials reduce their short exposure). You can view the reports here.

I imagine with the rise in Silver price there have been many  new speculators and investors jump on board, probably some of them right at the peak.  With well established commentators calling for a Silver price of $500 or even $6000, who can blame them? Looks like easy money right? Some will panic and sell their positions, however those that have researched the precious metals will know that while there are sharp corrections along the way, those that have held their positions through these sharp corrections have still been rewarded in the longer run.

Whether Silver bottoms at $19.50, $22, $25 or it has already bottomed, there are still gains to be had over the longer term (as the bull market continues it's course) in my opinion. If you can't handle seeing violent swings in price then perhaps Silver investment is not for you.

BB.

Disclosure: Positions held in Silver. Not investment advice. Do your own research.

Saturday, January 22, 2011

Silver Eagle Sales vs Silver Price: 2003 - 2010

By now I'm sure any regular readers would have picked up that I love numbers & constructing charts. While numbers can be manipulated to tell a story, by themselves they are unbiased and without emotion, so even if someone presents a set of data or chart skewed for their benefit, as long as you can go back to the original source and see the figures in their original form then you can interpret them yourself and draw your own conclusions.

Today I've used two sets of data to produce the following charts.

The first set of data is from the US Mint and represents ounces of Silver sold. The US Mint only sells American Silver Eagles in one size variety (1 ounce), so each unit of sale is an ounce. The reason I mention this is that the Gold Eagle comes in a variety of sizes. The data I've used for the charts is available on the US Mint website: HERE. I had to compile it myself as saw no option to download the data.

The second set of data I used is available on the Perth Mint website: HERE. I used the monthly figures (London Fix Average, USD) for the Price of Silver (POS).

The first chart is both the POS and ASE coin sales on the one chart (click the picture for a much larger view):

There's some interesting anomalies in the chart.

The first few years of the bull market show sharp increases in sales every December (this pattern also flows through earlier years all the way from the 1980s), I suspect this is either buyers increasing orders for last supply of each year or putting in orders for the following years coin, perhaps those more familiar with the release dates of the earlier ASEs could comment below. Regardless, when sales started to increase from 2008 onwards this seasonal buying hasn't been so prevalent (infact December 2010 saw the lowest monthly number sold since September of 2009).

One of the most interesting things I found was that the spikes in earlier years of the bull were to around the 2 million ounce mark and that figure is now almost acting as support as the sales spike downwards from even higher numbers (what were high points for early years are now lows for today).

We are currently seeing higher highs and higher lows, the signs of a healthy trend. The chart begs the question though, are ASE sales causing so much demand that the POS is being driven higher or are sales increasing due to a the rising POS and increasing investor demand due to this? It's a bit of a 'chicken before the egg' conundrum!

The second chart shows the annual tallies of ASE sales (for the past 10 years). It's pretty incredible how they have simply taken off since the onset of the GFC. The sales in January 2008 are where things really heated up. The previous two January's (in December 2006 & 2007) had recorded only sales of around 1 million per month, January of 2008 saw over 2 million sold.


With January 2011 ASE sales already at over 4.5m ounces it's looking likely that this year will continue the trend to an even higher number of ounces sold over the year.

Silver has broken down through support at $28, but with manic buying like we are seeing presently I'm just not sure that I see the price heading much lower from here.

I do believe we are heading into the third phase of the bull market as I discussed in another recent post.

I did talk about downside targets for Silver a couple of months ago after the initial peak ($29.33) and pull back, however I will need to revise these figures given the price peaked higher after this. I will try and find some time this weekend to do update these targets.

Personally I wouldn't try and time pullback buying, we are already closing in on a 15% correction in price from the peak. This is a significant correction already, although I wouldn't discount the possibility of seeing low 20s again (if only briefly).

BB.


Disclosure: Position held in Silver. Not investment advice. Do your own research.

Thursday, January 20, 2011

American Silver Eagle Sales Through The Roof

In a post a few days ago I mentioned that American Silver Eagle sales were seeing record demand and that January would likely set a new record:
It’s not only the Perth Mint that has seen record demand for retail Silver products. The US Mint reported huge demand in the first two weeks of their 2011 coin sales with 3.4m coins being sold to date in January with 1.7m alone sold in the first day. Given the record of 4.26m coins sold in November 2010, it looks likely a new record will be set.
Bullion Baron
Since that the US Mint has released updated figures which show January 2011 will officially set a new record with over 4.5m having been sold. If the current rate of sales continues we could see over 6m ounces sold in January alone.


To put that in perspective, United States Silver mine production is around 40m ounces of Silver per year. So 11.5% of US mine production has been used solely on less than 1 month of ASE sales! This months sales are already higher than some entire year sales, such as 1996 which saw 3.46m coins sold and 1997 which saw 3.63m sold.

With the current level of demand for Silver it's hard to see how the price will be kept this low for much longer.

BB.

Disclosure: Position held in Silver. Not investment advice. Do your own research.

Silver Lake Resources (SLR) - Resource Upgrade

Yesterday Silver Lake Resources (ASX: SLR) announced a resource upgrade.

The increase bought SLR's total Gold to 3m ounces, following a 1m ounce increase in July last year. These increases are on top of inventory depletion from production which is ongoing and on the increase.


I recently sold out of SLR (@ $2.38) to fund another purchase, however the opportunity to buy back in after the upgrade and at a cheaper share price (@ $2.13) was too difficult to resist. SLR closed yesterday at $2.19.

Providing the next quarterly report meets approval of investors I can see a strong rally pushing the price higher in the months ahead much like occurred following the July resource increase. The day before the July release the share price closed at $1.78, at the peak a few short months later (27th September) we saw an intraday high of $2.69, an increase of 51%. A similar rise from Tuesday's close price of $2 would see SLR at $3.02.

While we haven't yet had the 4th quarter activities report, an astute member on Hot Copper forums (SunburntLand) managed to pickup some clues in the resource upgrade announcement.
A hint for the Dec quarterly too

From today's announcement "the December 2010 resource inventory is calculated after allowing for the previous six
months mining depletion of 36,800 ounces"

Subtract Sep quarterly production of 15,922 oz gives a Dec quarterly production of 20,878 oz

That's a 30% increase quarter on quarter

I think we'll still hit our annual production per the guidance of 90-105k oz as the Costello open pit ramps up to full operation
Hot Copper
That is a promising figure, although many will also be watching for the total mining cost per ounce which blew out in the third quarter 2010 to $1024 from $822 in the second quarter and $692 in the first.

In the latest Gold Mining Journal SLR was once again crowned the 'Miner of the Year', this is the second year running after also winning in 2009.
“Silver Lake has shown an ability to continue to consistently deliver on production targets and it also has a very active exploration programme to replace mined resources and grow the business.”

A respected resources journalist nominated Silver Lake for similar reasons: “Silver Lake has shown, through consistency and sticking to its strategy, what a small gold miner can achieve in times of high gold prices. The company has at no stage attempted to get ahead of itself, preferring to meet its production targets and bedding down its operations before turning to more ambitious developments.”
Last year SLR produced a medallion (through the Perth Mint) to celebrate their milestone of 100,000 ounces of Gold produced. Given the low premium over spot price I purchase a couple. I created a small collage shortly afterward and posted it on a forum. Here it is again with yesterday's updated resource figure:


BB.

Disclosure: Position held in SLR. Not investment advice. Do your own research.

Wednesday, January 19, 2011

Mexican Libertad - Such a Beautiful Coin

It's not often that I've discussed physical coins on this blog, but I had some 2010 Mexican Libertads arrive today and it's such a beautiful coin I couldn't help but share a couple of photos I took of one.



BB.

USDX Support Failed, Driving Silver/Gold Higher

The price of Silver and Gold are currently being driven higher as the US Dollar Index falls beneath the previous support at just under 79. This level has been tested several times over the past 6 weeks.

The next level of support for the USDX appears to be 78 (assuming that the current break below support holds).

It will be interesting to see where it ends up over the next several trading sessions and what effect this will have on Gold/Silver. When there is no flight to safety (in which case sometimes Gold/USD rise together), generally speaking the Dollar and Gold/Silver have an inverse relationship, that is when the USD rises the metals drop and visa versa. So this move down for the Dollar is positive for the metals.

A lot of commentators are calling for the price of Silver to continue the correction that has been playing out the past couple of weeks, however with support at $28 having been respected I suspect the bottom is in and that we will soon be seeing new 30 year highs for this metal. As they say, you should be greedy when others are fearful, hope you bought the dip!


 


BB.

Disclosure: Position held in Silver and Gold. Not investment advice. Do your own research.

Monday, January 17, 2011

Manas Resources Ltd (MSR) - New All Time High

Manas Resources traded at all time highs today (35.5c) and closed (34c) above the previous high of 32c set in November 2010. It was +15% on the previous days close and looks potentially like a breakout. Volume was healthy with over 2.5m traded.

There's no guarantees that the breakout will hold, especially given Gold's recent weakness (although MSR bucked the trend today), but if it does it's blue sky territory from here. With no overhead resistance it will be interesting to see where the share price would end it's run.


MSR has not been listed on the ASX for very long. They came into  being as a result of Perseus Mining Limited (ASX: PRU) spinning out their Kyrgyz Republic mineral assets into a separate entity (July 2008).

Perseus Mining continues to hold a significant stake in the company.

Share price: 34c (as of close 17/01/2011)
Number of shares: 177.35m (after final placement in late January)
Number of options: 60m listed (+ 15m unlisted)
Market cap: $60.3m (undiluted)
Cash: $1.8m (Sept Qtr) + $11.5m (placement) = $13.3m
Gold resource: 1.13m Oz
Market Cap / Resource = $53 p/oz

The upside potential could come from the expected low initial capital cost of the Shambesai Project (to move to production) as well as the predicted low cash cost per ounce to mine ($250 per ounce for life of mine). A full feasibility stuy for this project has commenced.

Further to this MSR has huge exploration upside with 4400km2 in a highly prospective Gold province.


BB.

Disclosure: Position held in MSR. Not investment advice. Do your own research.

Sunday, January 16, 2011

Gold/Silver entering the 3rd phase of the bullmarket?


Disclaimer: I've found this topic to be an emotive one for some precious metal enthusiasts. Keep in mind this is my personal opinion. I may end up wrong, I may end up right. I would ask you keep an open mind while reading though and I encourage you to comment on this post whether you agree or disagree (providing some reasoning for your position).

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It's been my opinion for a few months now that we are entering the 3rd phase of the precious metals bull market. I believe that there is not much time left in this bull market and that we will have seen the peak within 2-3 years (max), quite possibly much sooner.

That does not mean I'm about to close my positions at today's prices.

It does not mean I think the metals are close to a "price" peak.

All it means is that I think the bull market will soon come to an end (likely in a parabolic blow off) and there have been several indicators that are leading me to this opinion.

Comparison to Bubble Chart

Some of you may have seen this chart in the past, it was produced by Dr. Jean-Paul Rodrigue and visualises the 4 "phases" of a bubble.


Now I know using this chart is likely to put many on the back foot. Let me say that I don't think Gold is in a bubble at today's prices... but I do believe that the price will ultimately end in a bubble. Based on that assumption we can try and work out what phase we are in the bull market currently and if we simply look at the price action of Gold or Silver over the last 8-10 years there is a eerily similarity between that time and the first 2 phases on the chart above.

 10 Year Gold Chart

10 Year Silver Chart

With the dip in 2008 looking very much like the first sell off (bear trap) in the bubble chart and increasing media attention (as discussed in more detail below), it looks very likely that we could be in in the transition from 2nd to 3rd stage.

Here is a video that I found charts the recent Silver action onto the bubble chart:


Not every bull market is going to look exactly the same, we may yet have another severe correction before seeing the peak, but with the heavy buying of the metals occurring on each dip I find this unlikely.

Similarities to 1970s Bull Market

The precious metals bull market in the 1970s ran for approximately 9 years, the current bull market we are in has been running for around the same length of time. By itself the timing similarities could have been overlooked, however with a host of other reasoning it’s hard to go past mentioning this. 

The 1970s bull market also had a large dip (bear trap) like we saw in 2008, infact it was even larger than the 2008 fall, dropping almost in half over 1975/1976 and then rallying out of the late 1976 low to a high in January 1980, approximately 3.5 years later. If we were to consider the 2008 drop to be the “bear trap” and expect a similar length of time to the peak (compared to 1970s) then we could expect the timing of the peak to be around early 2012, well within the time frame of when I expect we will see it.

Mainstream Media Coverage

Everyday comes an increase in coverage of precious metals in newspapers, magazines and on websites.

Now I've heard Jim Cramer talk about Gold before, to his credit I recall him in a late 2008 video where he talked about Gold as a crisis/chaos hedge. However, whether he's right more often or wrong more often the reality is that the smart money would not follow a character like this. He is larger than life and more often than not a spruiker with too much airtime to fill with too little worth telling. In this clip which aired November 2010 he:

- Discusses Bernanke's money printing
- Talks of Gold's 5000 year history as money
- Suggests 20% of a portfolio should be in Gold


YourTradingEdge is a popular traders magazine here in Australia. A mainstream investment magazine, here is the front cover for Jan/Feb 2011:


The article in the magazine not only talks about industrial demand, historical ratios such as the GSR and currency devaluation, but even brings up the topic of manipulation & GATA (who have been working to restore integrity to the precious metal markets)!

The below image/advert (rotating .gif) was recently spotted as the main banner on the Commsec trading website (the trading platform of Australia's largest bank):


Now Commsec may not be a mainstream media site, however it is a popular trading platform (possibly the most used in Australia) and is indicative that retail level investors are starting to get in on the Gold trade.

Gold and more recently Silver have been hitting mainstream news sites as well.

An article on news.com.au discussing a "beginner's guide" to investing in Gold:
Beginner's guide to investing in gold
GOLD'S glittering run up to record highs in the past few weeks has sparked intense interest in the precious metal.

There are several ways to invest in gold, however before you take the plunge you need to do your homework and understand what you want or expect from your investment.
Here is a recent article on Silver before it really took off in late 2010:
Silver looks ready to rip
BNP Paribas obviously thinks the price of silver is about to go on a tear.

It has agreed to pay $US20.58 an ounce for 680,000 ounces of the white metal to be delivered from December through to June 2012. That compares with a closing price on Friday in New York of $US20.79/oz (although intraday it poked its head above $US21/oz).
Even on a popular finance and banking informational website they recently covered Gold in an article that discussed the RBA's decision to sell a large portion of our Gold and how much it cost us:
Australian Central Bank Decision To Sell Gold Reserves Cost Country $5 Billion
Just over ten years ago, Australia’s central bank the RBA sold off most of the countries gold reserves under the belief that the price of gold would continue to remain flat, and that as an asset, it would no longer play any role in the future financial system, or any crises that may result.

Based on the current market price of $1,400 an ounce for gold, the decision to sell 167 tonnes of the precious metal by the central bank has cost Australia approximately $5 billion.
Now I can't claim to have seen a Gold related article hitting the front page of a physical newspaper, but I have seen (positive) articles about Gold hitting the home page of popular mainstream news sites such as news.com.au.

The above is only a taste of what I've seen in mainstream media or mainstream investor circles.

Mint Production/Retail Demand

One thing we’ve seen over the last 12-24 months is a large increase in demand for retail level mint products.

Perth Mint recently suspended production of their 5 and 10 ounce Silver coins so they could concentrate on more popular weights such as the 1oz and 1kg coins.
Some Silver Bullion Coins Suspended As Perth Mint Focuses On Most Popular Weights
At The Perth Mint, the silver coin presses are now at maximum output. In fact, we’re at the stage where we may not be able to completely satisfy wholesale demand, circumstances we were forced to confront during the GFC.

Before anyone suggests we’re running out of metal – simply not true. It’s manufacturing capacity that is the issue here.

So how are we handling the situation? As we’ve already communicated to our dealers, we have initiated a capital project which will provide a solution in the medium term. Right now, however, we’ve decided to focus production on kilo, 2oz, 1oz, and 1/2oz silver bullion coins at the expense of the 10oz and 5oz weights.
Since the launch of the 2011 bullion coin program (in September 2010) 1.75m ounces worth of 1kg coins have been sold (up to mid December), that’s approximately 55,000 (1kg) coins. 

To put that in context, Australia was the world’s 5th largest Silver producer in 2009 with 57.8m ounces produced. Assuming that level of production is similar today and we see similar demand for the 1kg coins over the next 9 months (that we’ve seen over the last 3), then we will see approximately 5.9m ounces worth of 1 kg coins purchased from Perth Mint (Sept 2010 to Sept 2011) or almost 10% of this country’s entire Silver production. Does that raise an eyebrow?

The Lunar 1oz range has continued to be popular with 230,000 of the 2011 Rabbits having left the mint, with the final 70,000 (of 300,000 mintage) being in production. It seems likely the series will be a sell out well in advance of the 2012 (Dragon) release.
Bumper Demand For Rabbits In Advance Of Chinese New Year
With just over three weeks to go before Chinese New Year celebrations kick-off on 3 February, 230,000 1oz silver bullion coins marking the Year of the Rabbit have left or are awaiting shipment from the Mint.

With a full mintage of 300,000, that means 76% of these coins are now accounted for. Sales are looking strong and as I write this post the factory is in the process of manufacturing the remaining 70,000 1oz silver coins.

The possibility of a sell-out is now looking extremely likely.
It’s not only the Perth Mint that has seen record demand for retail Silver products. The US Mint reported huge demand in the first two weeks of their 2011 coin sales with 3.4m coins being sold to date in January with 1.7m alone sold in the first day. Given the record of 4.26m coins sold in November 2010, it looks likely a new record will be set.
US Mint Sales: 2011 Bullion Eagles Off to the Races
2011 bullion eagles launched on January 3, 2011. Silver Eagles already have last year’s January record in their sight. The coins have raced to 3,407,000 in less than two weeks after their latest weekly pick-up of 1,322,000. Until January 2009, the silver coins had never topped the 3 million mark during the first month of a year. Those record sales totaling 3,592,500 may get clobbered in mere days. The all-time monthly high of 4,260,000 which was just set in November could be the next victim. As a side note, the 3,407,000 sold this month includes 469,500 of the 2010-dated issues. The US Mint had buyers order one 2010 Silver Eagle for every five of the 2011′s.
The Canadian Mint has been no exception seeing record production of their Silver maple leaf coins in 2010. Shortages of this coin in the last quarter of 2010 saw premiums on eBay (and other auction sites) for Maples soar.
Speculators polish up the price of silver
David Madge, director of bullion sales at the Royal Canadian Mint, says it has already sold in excess of 30 per cent more of its popular silver Maple Leaf coin than last year’s record 10m ounces.
One has to keep in mind that these are small retail products being sold in record numbers, not products that institutional and professional investors would normally be buying.

Not only are we seeing record sales, but there are reports of shortages here in Australia. Auspm, a member on the Silver Stackers forums reports:
Went into Downies in Sydney (Town hall arcade) today. 
Absolutely no specimen silver on display at all.
No Kooks, No Lunars, No Koalas.  No Eagles. No Maples.  No Philharmonics.  NOTHING!
Asked when the next lot was in?
'Nothing until MARCH' I am told!
'Silver is Money' in the same thread reports that:
A dealer in Sydney sent out an email yesterday informing that due to the holiday season there are short delays in the production of silver bullion bars from their suppliers and as a result there will be delays of between 2 - 3 weeks for 1kg.
In another thread, MelbBrad reports that:
I ordered 15x1kg PAMP silver (amongst other things silvery and shiny) from ABC in mid December.
Was advised at the time that delivery to Melb would be the week of Jan 10th.
Just called now, they have revised the delivery date to LATE FEBRUARY!!!
John from the stellaconcepts youtube channel also discussed Silver shortages with Bryan from Ainslie Bullion (a Brisbane dealer):

Relevant section from 3:20

Shortages have not been limited to Australia, Zero Hedge recently reported that BullionVault.com in Germany had run out of Silver:
Due to high demand our own silver stocks are exhausted right now.

As BullionVault is only dealing with physical bars which are already in our possession, we are currently unable to offer, silver on our own market. Of course, our market is still open to all our clients act with each other and set their own prices. This situation could lead to buyers and sellers at higher prices. Buyers are asked to check the price again before they confirm their order.

On Tuesday, 18 January 2011, we expect the next delivery for silver.

Zero Hedge
Not a long delay, but a sign of a tight market none the less.

Kruggerands, a popular South African Gold coin was also in high demand earlier this year leading to shortages that were reported in mainstream investment news:
World's Largest Gold Refiner Runs Out of Krugerrands
Aug. 28 (Bloomberg) -- Rand Refinery Ltd., the world's largest gold refinery, ran out of South African Krugerrands after an ``unusually large'' order from a buyer in Switzerland.

The order was for 5,000 ounces and it will take until Sept. 3 for inventories to be replenished, said Johan Botha, a spokesman for Rand Refinery in Germiston, east of Johannesburg. He declined to identify the buyer.

Bloomberg
Of course an order of this size can hardly be considered "general public" buying, however given the form of purchase it also seems unlikely to be institutional buying. More like a retail buyer with deep pockets.

So with retail sized products being snapped up in almost "mania" quantities it's hard to believe that a majority of this buying is coming from the "smart" investors who have entered this bull market stealthily over recent years.

Physical Premiums

It’s becoming apparent that eBay users are buying up precious metal products (predominantly obvious in Silver currently) at well above prices available from the Perth Mint and other bullion dealers. In my opinion this activity is due to new buyers getting caught up in the hype and not doing their research on where to buy for a better price.

The below picture shows 10oz Perth Mint bars selling for well above prices available direct from Perth Mint on the same day, where these bars could be acquired for $320 + delivery costs:

Large premiums have not only been seen on Silver products, there have been circumstances where Gold products have also seen a premium, like in early 2010 where demand for Sovereigns increased strongly due to the financial instability in some Euro-zone areas:
Profits from Gold Sovereign Shortage
Even as South African Krugerrands continue to be in strong demand in Europe, British sovereigns are the coin of choice for gold buyers in Greece.

In the first four months of 2010, the Greek central bank reported selling 50,000 sovereigns from its gold reserves. Bank officials also estimate that another 100,000 coins had changed hands in the nation’s black market. The Bank of Greece has sold these coins at prices so high that buyers effectively are now paying more than $1,700 per ounce for the gold content.
The last time I recall Silver premiums like we are seeing now was in late 2008, however that was at a spot price low, rather than near 30 year spot price highs like we are seeing today.

Lines at bullion/coin stores

When talking about the signs we might see in a 3rd phase of the bull market a lot of Gold bugs & commentators will talk about the "lines around the block" to the bullion/coin stores, like was seen in the last bull market. They imply that until we see that level of visible public activity that we are not yet in the mania phase. This fails to take into account a few different factors.

ETFs/Online Trading/Electronic Gold & Silver

We are living in a world that is constantly evolving and changing to keep up with technological advances. It's only been during this bull market that we've had the introduction of precious metals ETFs, pool accounts and electronic metals that allow the easy purchase of Gold/Silver online (sometimes backed by real metal, stored by a custodian).

Access to changes in the price of Gold/Silver using these products means that there may be a rush on precious metals without seeing people lining up on the streets to buy physical. Unless we see a situation where people literally need to barter with physical (e.g. a SHTF situation) or if one of the major companies that store physical metals for their customers defaults on delivery (and we see a fear of "paper metal" products), then I find it highly unlikely that the entire general population will head down the physical path

The reality is that we may not see the “lines around the block” to the coin/bullion store that was seen in the 70s (at least not in western societies). There are much easier ways to buy or gain exposure to precious metals than there was 30-40 years ago.

Further to this, forums, blogs and other resources on the internet make it much easier for people to research precious metal mining companies. This may lead to more money being allocated to the precious metal stocks (which often offer leverage to the physical price) than was the case in the 1970s bull market.

Online Purchasing

Another factor that will reduce the foot traffic at bullion stores is the ability to buy physical metals online and have it delivered. There are many dealers that offer online purchase and delivery, infact some rely entirely on this business model without having a physical shop front.

There is a lot of discussion about online ordering of metals on related forums such as Silver Stackers, GoldIsMoney and Kitcomm. eBay and other online trading sites also allow the exchange of precious metals via post or in person without the need for a bullion store.

I have no doubts that those that invested in bullion early are a resourceful and intelligent bunch. It seems more likely when it comes time to sell they will redistribute to the public via channels that will net them the best price  (and most anonymous form of disposal) and that's unlikely to be via sale to a dealer.

West vs East

Another thing that most fail to consider and discuss is that during the 1970s Australia and other western economies had a much higher savings rate. Also we were much less choked by the interest payments on our mortgages, which begs the question... just how many dollars does the average Australian (or American) have spare to put into Gold and Silver if we do hit a mania/bubble stage?


The chart below shows how much of our (Australia's) disposable income goes into the interest on mortgages. Even with interest rates much lower today than in the 70s the cost of interest alone is higher than double what it was during that time, simply due to the ridiculous house prices we have today.


Today's savers are not in the west, they are in the East. Based on this I think rather than watching the lines of stores in developed/western countries, rather we should watch the store lines in emerging economies in countries such as China and India.


Summary and Conclusion

So to quickly summarise what we are currently seeing:

- Price action which is mimicking a bubble chart
- Similar length of time to 1970s bull market
- Mainstream media coverage increasing
- Record mint production of retail products
- Shortages of retail sized products
- Premiums where public would be buying

The above discussion points are not hard evidence that we are entering the 3rd phase of the precious metals bull market; however they certainly do paint the picture that we may be doing so. Some of these occurrences (shortages, premiums, etc) were seen in late 2008, with the difference being that it was with a falling Silver price, rather than with the 30 year highs that we are seeing at the moment. I expect the interest in Silver to remain strong over 2011, likely pushing the price to new 30 year records. I think there is a real opportunity in Silver stocks which are still reasonably priced given the rise we’ve seen in the Silver spot price.

All the above said, while I think the time left in the bull market will be short, I think the price rise from here could be spectacular. In my opinion the 3rd phase of the 1970s bull market started in mid 1978 and the price of Gold better than quadrupled between then and the intraday peak in January 1980, a short 1.5 years later.

If heavily invested in the metals, make sure you have an exit plan, make sure you keep your eyes open and you're mentally prepared to sell your metals when it makes sense. No doubt there will be a lot of hype at the peak, greed will consume most when Gold really starts to move,  many will hold through the peak and all the way down the other side. Don't be one left holding the bag.

As I said at the start of this post, I welcome and would encourage you to comment below. 


BB.

Disclosure: Positions held in Silver, Gold and related stocks. Not investment advice. Do your own research.

Wednesday, January 12, 2011

Silver Bull Market - 70s vs Today



Here's a couple of interesting charts. I compiled it using data provided by the Perth Mint. You cant download the data for yourself from here:

Precious Metals Prices

The above two charts were achieved by taking the (monthly) London Silver Fix (average) and calculating the month on month growth (whether negative or positive). Each green bar represents one month of growth.

The 1970s Silver bull market ran for approximately 9 years.

The bull market we are in now has been running for approximately the same number of years.

The chart shows that the current market has been much more volatile. The large swings to the downside are evidence of that.

The chart from the 1970s shows just how suddenly things can turn where the price went parabolic with very little warning at all.

It is my opinion that we are in/entering the third stage of the current bull market for precious metals. That doesn't mean I think we are near the price peak, but I do think we will see the peak within 12-24 months.

I am in the process of writing a post that explains what I am seeing that points towards this outlook, I should have it up in the next few days.


BB.

Disclosure: Positions held in Silver. Not investment advice. Do your own research.

Tuesday, January 11, 2011

You'd be crazy not to own Gold...

Gold will eventually rally exponentially and investors who don't own the precious metal are "insane," and may be showing "masochistic tendencies," Robin Griffiths, technical strategist at Cazenove Capital, told CNBC.
CNBC
The words of a technical strategist, however the message rings true.

Robin comments that the downtrend in the dollar is powerful and it's important to close dollar (USD) positions on any rally. Also he comments that base metals are a worthwhile buy based on their breakout to new highs.

Dollars continue to be printed. Only the other day Geithner wrote a letter in support of increasing the US debt limit (again!).
Geithner Urges Debt Limit Increase, Warns of Default

Jan. 6 (Bloomberg) -- Treasury Secretary Timothy F. Geithner said lawmakers must raise the federal borrowing limit in the first quarter of 2011 or risk a default on U.S. debt and a loss of access to global credit markets.

A failure to act would cause “catastrophic damage to the economy, potentially much more harmful than the effects of the financial crisis of 2008 and 2009,” Geithner said in a letter to Speaker of the House John Boehner, Senate Majority Leader Harry Reid and all other members of Congress. Lawmakers should act before a default becomes “imminent” because damage from even a short-term disruption “would last for decades.”

Bloomberg
I have a feeling that someday soon the American people will stand up and say "enough is enough" and force the hand of US Congress/Treasury to stop allowing further debt to accrue. If not the American people, then China or other foreign entities purchasing their debt. It's by that point you would want to ensure you had sold your dollars and bought Gold.

Here's a polished little video that's doing the rounds. Food for thought and it presents some interesting facts...

 

BB.

Disclosure: Positions held in Gold. Not investment advice. Do your own research.

Sunday, January 2, 2011

Gold, Silver, Stocks & Property Predictions - 2011

Well it's been quite a year both personally and for the markets.

On a personal note I started in a new role at work, got married in October and almost doubled the net worth of my wife and I. I also started this blog in September to keep track of my ideas and opinions, it's really helped keep me grounded (which can be tricky given the emotional buy in that a lot of precious metal market commentary tries for).

My goal with precious metal investments is turn my capital into enough to purchase a house outright (no mortgage) and this year put me on well on track to achieving this in the near future.

Below is some reflection on how Gold, Silver, Stocks and Australian property fared over 2010 and what I think is instore for 2011.

Gold

2010

Gold had a great year in 2010, closing on December 31st 2009 at $1096, it has managed to close near all time highs at $1420. It was no slouch in Australian dollars and other currencies either, closing at AUD$1220 on December 31st 2009 and finishing 2010 at AUD$1388.

Here is a chart comparing it's performance against a group of world currencies:


With many central banks looking to competitively devalue their currencies and reduce the pressure of crippling debts, it's not a surprise how well Gold has performed.

2011 

In my opinion Gold will continue the trend and rise in 2011. For a repeat of the % gain we saw in 2010, Gold would have to close 2011 at over $1800. Whether we see Gold close 2011 at those sorts of prices I'm not sure, but would not be surprised to see Gold spike that high in the first half of the year. My prediction is that Gold closes 2011 at over US$1600, likely with a spike to US$1800+ at some point during the year.

All the fundamental drivers that pushed up the price of Gold over the last decade are still in place, so expect no change from it's upwards trajectory. With the IMF having finished their Gold sales it will be interesting to see which central banks are still looking to increase Gold as part of their reserves and whether the removal of the IMF sales overhang has any impact on the price.

Silver

2010

If Gold had a great year, then Silver had a spectacular year!

Silver closed 2009 at $16.84 on December 31st, dropped to a low of $15 (close) early in 2010, however finished the year at $30.85, more than 100% higher than the lows and around an 83% gain over the entire year.

Against Gold (measured by the Gold:Silver ratio) Silver did remarkably, well dropping from a GSR of around 65 at the start of the year (1 Gold ounce = 65 Silver ounces) to 46.


On previous spikes in the Silver price the ratio has dropped to this level and then bottomed and reversed higher, will it be the same this time? It's worth noting that during the last precious metals bull market the ratio dropped back to around 17, so there should be no question that Silver has the potential to continue rising faster than Gold.

2011
 
There has been a lot of hype building around Silver in the last half of this year following the magnificent rally and increasing public interest. We've got commentators calling for the public to "crash JP Morgan, buy Silver", we've got multiple  class action lawsuits being lodged against JPM and HSBC, we've got the CFTC to soon be imposing position limits in the metals, (and other markets) which some believe will reduce JPM's ability to "manipulate the price". It's hard to ignore the mainstream media attention this activity has been achieving.

From a technical perspective (as I pointed out in an earlier post) Silver above $30 looks to be a breakout past a resistance line that has been in place for some 7 years.


I would suspect the next major resistance will be at the 30 year nominal highs (around US$50). My prediction is that Silver will surpass and close the year above $40 in 2011 and possibly spike to over $50 at some point during the year (likely in the first half).

Stocks

2010

There has been some exciting activity this year in some sectors. Namely the precious metals sector and REE (Rare Earth Elements). While precious metal stocks continue to rise orderly with the price of Gold and Silver, many REE stocks have seen moonshots.

Of course this hasn't been without good reason with China reducing their export quotas it has meant a sharp rise in the price of some of the raw materials, rises up to hundreds of percent for some of them. This has seen some very speculative rises in REE stocks, in some cases  even for companies where they won't have an ability to dig their resource out of the ground for years. Whether the rise seen in these stocks will continue is hard to say, it's starting to get very speculative in REE and although China controls a majority of REE mines/ouput, rises like we've seen could get some companies along to production perhaps much sooner than otherwise anticipated, it will bring deposits otherwise not economic to mine to be profitable, increasing sources for REE outside of China. Further to this if we see a drop in economic activity this could affect the demand for REE and drop the prices of the raw materials (where as it's my opinion that Gold and potentially Silver could continue to perform well as a monetary metal should economic conditions worsen).

In late 2010 we saw the HUI break out of a 2+ year consolidation. However it performed only marginally better than Gold itself (only around 3% better over the year).


The GDX performed similarly to the HUI, however the GDXJ (junior stocks) broke away in the latter half of the year.


The general markets in my opinion are a waste of time at the moment. I just don't see room with the present economic conditions for a buy and hold (blue chip) strategy to do well. Why tie yourself down to under-performing assets?

The XGD, an index tracking a group of Gold stocks on the ASX performed very well over 2010, recording a 38% increase, much higher than the 13% increase seen in the price of AUD Gold.

XGD closed 5856 December 31st, 2009
XGD closed 8099 December 31st 2010

Seems that it was following the sentiment of the US price of Gold and stocks, moreso than the sentiment of the metal priced in local dollars.

While I didn't have the blog operational at the start of 2010 I did perform some stock picks (ASX Listed) for 2010 on Hot Copper forums. Here is how they performed over the 12 months:

A1 Minerals (AAM) - .37 to .11 (- 70%)
Silver Lake Resources (SLR) - 1.06 to 2.37 (+ 123%)
Cobar Consolidated Resources (CCU) - .235 to .575 (+ 144%)
Troy Resources (TRY) - 2.39 to 3.98 (+ 66%)
Gold Anomaly (GOA) - .038 to .036 (- 5%)
Average Gain = +51.6% (not including TRY's dividend)

A pretty respectable performance.

2011

I expect the general market will continue to underperform specific sectors so don't see much reason to comment on it. I do expect that the Dow:Gold ratio will continue to fall (e.g. the Dow will fall when priced in Gold), currently sitting at around 8:1 I would expect to see it fall to 6:1 or lower during 2011, ultimately on it's way in the next couple of years to 1:1 (if only briefly).

Here are my 5 picks for 2011 (not  a recommendation to buy):

I have written blogs on each of the above stocks and you can click the above names to be taken to the write-ups. I will keep track of these stocks on the blog regularly to see how they perform over the year, but am expecting to see at least a 100% increase across the board (average gain).

I expect that the HUI and other Gold indexes will continue their rise and will outperform the metals themselves. I think the juniors will continue to outperform the majors. My prediction is we will see HUI over 800 and the XGD over 10,000 at some point during 2011.

Australian Property (Residential)

2010

In all honesty I did not expect Australian housing to hold up this year the way it has. Although housing in many cities has now started to retreat in price I think many bears where taken back by some of the large price increases early in the year (especially in Melbourne). While we had first home buyers stepping back after reduced stimulus (removal of First Home Buyers Boost, FHOB), we had investors step up to the plate and continue the buying at these ridiculous prices. With yields as they are in Australia one has to assume that investors were buying with the expectation that we would continue to see strong price growth, because it sure isn't for the rental return, a higher return can be achieve currently with cash in a term deposit.


We've had 4 rate rises this year and the banks increasing their rates even more than the official moves. This has put additional pressure on mortgage holders who were paying interest rates 30% lower only 2 years ago in early 2009 (with variable rates at just over 5% instead of just over 7% as many are today).

2011

Christopher Joye has suggested we will need to see further interest rate rises in 2011 for house prices to fall, but I suspect this will not be the case. As I pointed out in my blog "Australia's 2009 First Home Buyer Bubble" there was a large increase in honeymoon rate home loans (at the same time as record numbers of first home buyers), most of these would have been 1 and 2 year products, so we could very well be in the middle of a lot of resets from rates as low as 4% to rates over 7%, that would be a 75% increase in interest costs!

National auction rates (weighted average) slipped under 50% towards the end of the year.


As I've pointed out previously, national clearance rates under 50% tend to point towards falling prices.


We're heading into 2011 with:

- Stock on market almost double what it was heading into 2010
- Clearance rates under 50%
- Mortgage delinquencies on the increase
- Increase in days on market and price discounting (Brisbane, Perth)
- Interest rates higher than 12 months ago and increase further
- New home sales looking weak
- Prices falling nationally with prices back to May 2010 levels

I think 2011 will bring house price falls with or without further increases in rates. That is provided the government doesn't step in once again with stimulus like they did in 2008 by doubling/tripling the First Home Owners Grant (e.g. the FHOB).

Without changes to interest rates I suspect we will see nationwide falls of 2-4%. With at least 2 increases to the cash rate I suspect prices would be more likely to fall 4-6% or greater.

Conclusion

The above analysis and conclusions are just my own personal thoughts on how things might play out over the next 12 months. There are many potential black swans waiting in the shadows to take the markets (either stocks, metals or property) by surprise, so it's difficult to say with any certainty what will happen.

I wish you all well for 2011 and look forward to continuing to provide information and my thoughts about Gold, Silver, Stocks and Property.


BB.

Disclosure: Position held in Gold, Silver and some of the stocks mentioned. Not investment advice. Do your own research.